Drilling Tools International Corp 10-Q for FY2024 Q2
Drilling Tools International Corp (DTI)
About this 10-Q
Drilling Tools International Corp filed this 10-Q on August 9, 2024, covering the quarter ended June 30, 2024 (FY2024 Q2).
Headline figures
Quarter ended June 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $37.53M
- down 1.0% from $37.91M a year earlier
- Net income
- $365K
- down 61.0% from net income of $937K a year earlier
- Diluted EPS
- $0.01
- down 80.0% from $0.05 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____ to ____
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes
As of August 9, 2024, the registrant had
Table of Contents
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1 |
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PART I. |
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Item 1. |
3 |
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3 |
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Condensed Consolidated Statements of Income and Comprehensive Income |
4 |
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5 |
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7 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
8 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29 |
Item 3. |
39 |
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Item 4. |
40 |
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PART II. |
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Item 1. |
42 |
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Item 1A. |
42 |
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Item 2. |
42 |
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Item 3. |
42 |
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Item 4. |
42 |
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Item 5. |
42 |
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Item 6. |
43 |
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44 |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report on Form 10-Q (this “Report”) may constitute "forward-looking statements" for purposes of the federal securities laws. These forward-looking statements include, but are not limited to, statements regarding our and our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward‑looking. Forward-looking statements in this Report may include, for example, statements about:
1
The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on our business. There can be no assurance that future developments affecting our business will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in this Report under Part II, Item 1A. “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the effect of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.
The forward-looking statements made by us in this Report speak only as of the date of this Report. Except to the extent required under the federal securities laws and rules and regulations of the SEC, we disclaim any obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, there is no assurance that the events or results suggested by the forward-looking statements will in fact occur, and you should not place undue reliance on these forward-looking statements.
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, |
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December 31, |
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(In thousands, except share data) |
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2024 |
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2023 |
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(Unaudited) |
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(Audited) |
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ASSETS |
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Current assets |
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Cash |
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$ |
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$ |
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Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other current assets |
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Investments - equity securities, at fair value |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease right-of-use assets |
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Intangible assets, net |
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Goodwill |
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Deferred financing costs, net |
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Deposits and other long-term assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other current liabilities |
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Current portion of operating lease liabilities |
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Current maturities of long-term debt |
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Total current liabilities |
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Operating lease liabilities, less current portion |
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Long-term debt |
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Deferred tax liabilities, net |
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Total liabilities |
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(See Note 14) |
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Shareholders' equity |
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Common stock, $ |
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Additional paid-in-capital |
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Accumulated deficit |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
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Three months ended June 30, |
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Six months ended June 30, |
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(In thousands, except share and per share data) |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenue, net: |
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Tool rental |
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$ |
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$ |
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$ |
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$ |
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Product sale |
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Total revenue, net |
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Operating costs and expenses: |
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Cost of tool rental revenue |
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Cost of product sale revenue |
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Selling, general, and administrative expense |
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Depreciation and amortization expense |
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Total operating costs and expenses |
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Income from operations |
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Other expense, net: |
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Interest expense, net |
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( |
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( |
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( |
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( |
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Gain (loss) on sale of property |
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( |
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Unrealized gain on investments in equity securities |
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Other (expense) |
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( |
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( |
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( |
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( |
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Total other expense, net |
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( |
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( |
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( |
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( |
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Income before income tax expense |
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Income tax (expense)/benefit |
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( |
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( |
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( |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Accumulated dividends on redeemable convertible preferred stock |
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Net income available to common shareholders |
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$ |
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$ |
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$ |
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$ |
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Basic earnings per share |
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$ |
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$ |
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$ |
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$ |
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Diluted earnings per share |
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$ |
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$ |
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$ |
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$ |
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Basic weighted-average common shares outstanding* |
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Diluted weighted-average common shares outstanding* |
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Other comprehensive income (loss): |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Foreign currency translation adjustment, net of tax |
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( |
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( |
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( |
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Comprehensive income |
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$ |
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$ |
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$ |
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$ |
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* Shares of legacy redeemable convertible preferred stock and legacy common stock have been retroactively restated to give effect to the Merger.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
DRILLING TOOLS INTERNATIONAL CORPORATION
(UNAUDITED)
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Redeemable Convertible Preferred Stock |
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Common Stock |
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Treasury Stock |
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(In thousands, except share and per share data) |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
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Amount |
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Additional |
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Accumulated |
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Accumulated |
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Total |
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BALANCE, December 31, |
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$ |
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$ |
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( |
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$ |
( |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Retroactive application of Merger |
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( |
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— |
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( |
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( |
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( |
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- |
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— |
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— |
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Adjusted Balances, beginning of period* |
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— |
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— |
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( |
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( |
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Accretion of redeemable |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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( |
) |
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Foreign currency |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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- |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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BALANCE, March 31, 2023 |
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$ |
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$ |
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— |
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$ |
— |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net exercise of DTIH stockholders stock options |
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— |
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— |
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— |
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- |
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— |
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— |
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— |
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Exchange of DTIH redeemable convertible preferred stock for DTIC Common Stock |
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( |
) |
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( |
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— |
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— |
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— |
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— |
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Issuance of DTIC Common Stock to former holders of DTIH redeemable convertible preferred stock in connection with Exchange Agreements |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Merger, net of redemptions and transaction costs |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Issuance of DTIC Common Stock in connection with the consummation of the PIPE Financing |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment, net of tax |
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— |
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— |
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— |
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— |
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— |
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— |
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- |
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— |
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( |
) |
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( |
) |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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- |
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- |
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BALANCE, June 30, 2023 |
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— |
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$ |
— |
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$ |
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— |
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$ |
— |
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$ |
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$ |
( |
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$ |
( |
) |
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$ |
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* Shares of legacy redeemable convertible preferred stock and legacy common stock have been retroactively restated to give effect to the Merger.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
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Common Stock |
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(In thousands, except share and per share data) |
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Shares |
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Amount |
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Additional |
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Accumulated |
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Accumulated |
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Total |
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BALANCE, December 31, |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Foreign currency |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net income |
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— |
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— |
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— |
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— |
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BALANCE, March 31, 2024 |
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( |
) |
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( |
) |
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Stock-based compensation |
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— |
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— |
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— |
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Exercise of stock options |
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— |
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( |
) |
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( |
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Shares issued due to vesting of restricted stock units |
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— |
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— |
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— |
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Foreign currency |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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BALANCE, June 30, 2024 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
DRILLING TOOLS INTERNATIONAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six Months Ended June 30, |
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(In thousands) |
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2024 |
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2023 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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||
Adjustments to reconcile net income to net cash from operating activities: |
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Depreciation and amortization |
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Amortization of deferred financing costs |
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Non-cash lease expense |
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Provision for excess and obsolete inventory |
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Provision for excess and obsolete property and equipment |
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Provision for credit losses |
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( |
) |
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|
Deferred tax expense |
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( |
) |
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|
Gain on sale of property |
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( |
) |
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( |
) |
Loss on asset disposal |
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Unrealized loss on interest rate swap |
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Unrealized gain on equity securities |
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( |
) |
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( |
) |
Gross profit from sale of lost-in-hole equipment |
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( |
) |
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( |
) |
Stock-based compensation expense |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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( |
) |
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( |
) |
Prepaid expenses and other current assets |
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( |
) |
|
Inventories, net |
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( |
) |
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|
|
Operating lease liabilities |
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|
( |
) |
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|
( |
) |
Accounts payable |
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( |
) |
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|
Accrued expenses and other current liabilities |
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( |
) |
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Net cash flows from operating activities |
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Cash flows from investing activities: |
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||
Acquisition of a business, net of cash acquired |
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( |
) |
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|
Proceeds from sale of property and equipment |
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||
Purchase of property, plant, and equipment |
|
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( |
) |
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( |
) |
Proceeds from sale of lost-in-hole equipment |
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Net cash from investing activities |
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|
( |
) |
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|
( |
) |
Cash flows from financing activities: |
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||
Proceeds from Merger and PIPE Financing, net of transaction costs |
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||
Payment of deferred financing costs |
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( |
) |
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( |
) |
Proceeds from revolving line of credit |
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||
Payments on revolving line of credit |
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( |
) |
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( |
) |
Proceeds from Term Loan |
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||
Repayment of Term Loan |
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|
( |
) |
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|
Payments to holders of DTIH redeemable convertible preferred stock in connection with retiring their DTI stock upon the Merger |
|
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|
( |
) |
|
Net cash from financing activities |
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|
|
|
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|
||
Effect of changes in foreign exchange rates |
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|
( |
) |
|
|
( |
) |
Net change in cash |
|
|
|
|
|
|
||
Cash at beginning of period |
|
|
|
|
|
|
||
Cash at end of period |
|
$ |
|
|
$ |
|
||
Supplemental cash flow information: |
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|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
Cash paid for income taxes |
|
$ |
|
|
$ |
|
||
Non-cash investing and financing activities: |
|
|
|
|
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|
||
Fair value of CTG liabilities assumed in CTG Acquisition |
|
$ |
|
|
$ |
|
||
ROU assets obtained in exchange for operating lease liabilities |
|
$ |
|
|
$ |
|
||
Net exercise of stock options |
|
$ |
|
|
$ |
|
||
Shares withheld from exercise of stock options for payment of taxes |
|
$ |
|
|
$ |
|
||
Purchases of inventory included in accounts payable and accrued expenses and other current liabilities |
|
$ |
|
|
$ |
|
||
Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities |
|
$ |
|
|
$ |
|
||
Deferred financing fees included in accounts payable |
|
$ |
|
|
$ |
|
||
Non-cash directors and officers insurance |
|
$ |
|
|
$ |
|
||
Non-cash Merger financing |
|
$ |
|
|
$ |
|
||
Exchange of DTIH redeemable convertible preferred stock for DTIC Common Stock in connection with the Merger |
|
$ |
|
|
$ |
|
||
Issuance of DTIC Common Stock to former holders of DTIH redeemable convertible preferred stock in connection with Exchange Agreements |
|
$ |
|
|
$ |
|
||
Accretion of redeemable convertible preferred stock to redemption value |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
NOTE 1 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Drilling Tools International Corporation, a Delaware corporation ("DTIC" or the "Company"), is a global oilfield services company that designs, engineers, manufactures and provides a differentiated, rental-focused offering of tools for use in onshore and offshore horizontal and directional drilling operations, as well as other cutting-edge solutions across the well life cycle.
On June 20, 2023 (the “Closing Date”), a merger transaction between Drilling Tools International Holdings, Inc. (“DTIH”), ROC Energy Acquisition Corp (“ROC”), and ROC Merger Sub, Inc., a directly, wholly owned subsidiary of ROC (“Merger Sub”), was completed (the “Merger”) pursuant to the initial merger agreement dated February 13, 2023 and subsequent amendment to the merger agreement dated June 5, 2023 collectively, (the “Merger Agreement”). In connection with the closing of the Merger, ROC changed its name to Drilling Tools International Corporation. The common stock of DTIC (“DTIC Common Stock” or the “Company’s Common Stock”) commenced trading on the Nasdaq Stock Market LLC (“Nasdaq”) under the symbol “DTI” on June 21, 2023.
On March 15, 2024 (the “CTG Acquisition Date”), we entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with Casing Technologies Group Limited (“CTG”), certain shareholders of CTG, and a representative of CTG. Pursuant to the terms of the Share Purchase Agreement, the Company acquired one hundred percent (
The Company’s United States (“U.S.”) operations have locations in Texas, California, Louisiana, Oklahoma, Pennsylvania, North Dakota, New Mexico, Utah, and Wyoming. The Company’s international operations are located in Canada, United Kingdom, Germany, United Arab Emirates, Saudi Arabia, Kuwait, Oman, Malaysia, and Australia. Operations outside the U.S. are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws and possible limitations on foreign investment. The Company does not engage in hedging activities to mitigate its exposure to fluctuations in foreign currency exchange rates.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the U.S (“U.S. GAAP”) as set forth by the Financial Accounting Standards Board ("FASB") and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). References to US GAAP issued by the FASB in these notes to the accompanying unaudited condensed consolidated financial statements are to the FASB Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASUs”).
Unaudited Interim Financial Information
The accompanying interim unaudited condensed consolidated financial statements included in this quarterly report have been prepared in accordance with U.S. GAAP and, in the opinion of the Company, contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of June 30, 2024, and its results of operations for the three and six months ended June 30, 2024 and 2023, and cash flows for the six months ended June 30, 2024 and 2023. The condensed consolidated balance sheet at December 31, 2023, was derived from the audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements.
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups Act (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging
8
growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard, until such time the Company is no longer considered to be an emerging growth company. At times, the Company may elect to early adopt a new or revised standard. As such, the Company’s financial statements may not be comparable to companies that comply with public company effective dates.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the Company’s unaudited condensed consolidated financial statements and accompanying notes as of the date of the unaudited condensed consolidated financial statements. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. In the current macroeconomic and business environment affected by the Russia-Ukraine and Israel-Hamas conflicts and inflationary pressures, these estimates require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, these estimates may change materially in future periods.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated on consolidation. Further, the basis of consolidation incorporates the financial statements of our foreign entity, Casing Technologies Group Limited, which operates under UK Generally Accepted Accounting Principles ("UK GAAP"). Those financial statements are translated into U.S. GAAP for consolidation purposes. The translation process adheres to established accounting standards and guidelines to ensure consistency and comparability across our consolidated financial statements. This approach enables us to accurately reflect the financial position, results of operations, and cash flows of our consolidated operations.
Foreign Currency Translation and Transactions
The Company has determined that the functional and reporting currency for its operations across the globe is the functional currency of the Company’s international subsidiaries. Accordingly, all foreign balance sheet accounts have been translated into U.S. dollars using the rate of exchange at the respective balance sheet date. Components of the unaudited condensed consolidated statements of income and comprehensive income have been translated at the average rates during the reporting period. Translation gains and losses are recorded in accumulated other comprehensive loss as a component of stockholders’ equity. Gains or losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in the unaudited condensed consolidated statements of income and comprehensive income. For the three and six months ended June 30, 2024, the aggregate foreign currency translation included in the unaudited condensed consolidated statements of income and comprehensive income totaled approximately $
Revenue Recognition
The Company recognizes revenue in accordance with Topic 842 (which addresses lease accounting) and Topic 606 (which addresses revenue from contracts with customers). The Company derives its revenue from two revenue types, tool rental services and product sales.
Tool Rental Services
Tool rental services consist of rental services, inspection services, and repair services. Revenue from tool rental services are accounted for in accordance with Topic 842.
Owned tool rentals represent the most significant revenue type and are governed by the Company’s standard rental contract. The Company accounts for such rentals as operating leases. The lease terms are included in the contracts, and the determination of whether the Company’s contracts contain leases generally does not require significant assumptions or judgments. The Company’s lease revenues do not include material amounts of variable payments. Owned tool rentals represent revenue from renting tools that the Company owns.
9
The Company does not generally provide an option for the lessee to purchase the rented equipment at the end of the lease.
The Company recognizes revenues from renting tools on a straight-line basis. The Company’s rental contract periods are daily, monthly, or per well. As part of this straight-line methodology, when the equipment is returned, the Company recognizes as incremental revenue the excess, if any, between the amount the customer is contractually required to pay, which is based on the rental contract period applicable to the actual number of days the drilling tool was out on rent, over the cumulative amount of revenue recognized to date. In any given accounting period, the Company will have customers return the drilling tool and be contractually required to pay the Company more than the cumulative amount of revenue recognized to date under the straight-line methodology. Additionally, the Company has rental contracts that are based on usage, either on a per footage or per well basis. As these types of rental contracts primarily consist of variable lease payments, which are unknown at commencement, revenue is recognized when the changes in the factor on which the contingent lease payments are based occur. When the customer returns the rental equipment and the footage or usage becomes known, the Company recognizes revenue.
The Company records the amounts billed to customers in excess of recognizable revenue as deferred revenue on its unaudited condensed consolidated balance sheet.
As noted above, the Company is unsure of when the customer will return rented drilling tools. As such, the Company does not know how much the customer will owe the Company upon return of the tool and cannot provide a maturity analysis of future lease payments. The Company’s drilling tools are generally rented for short periods of time (significantly less than a year). Lessees do not provide residual value guarantees on rented equipment.
The Company expects to derive significant future benefits from its drilling tools following the end of the rental term. The Company’s rentals are generally short-term in nature, and its tools are typically rented for the majority of the time that the Company owns them.
Product Sales
Product sales consist of charges for rented tools that are damaged beyond repair, charges for lost-in-hole, and charges for lost-in-transit while in the care, custody or control of the Company’s customers, and other charges for made to order product sales. Product sales are accounted for under Topic 606.
Revenue is recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for its arrangements with customers, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the revenue standard. The transaction price is measured as consideration specified in a contract with a customer and excludes any sales incentives and taxes or other amounts collected on behalf of third parties. As each of the Company’s contracts with customers contain a single performance obligation to provide a product sale, the Company does not have any performance obligations requiring allocation of transaction prices.
The performance obligation for made to order product sales is satisfied and revenue is recognized at a point in time when control of the asset transfers to the customer, which typically occurs upon delivery of the product or when the product is made available to the customer for pickup at the Company’s shipping dock. Additionally, pursuant to the contractual terms with the Company’s customers, the customer must notify the Company of, and purchase from the Company, any rented tools that are damaged beyond repair, lost-in-hole, or lost-in-transit while in the care, custody or control of the Company’s customers. Revenue is recognized for these products at a point in time upon the customer’s notification to the Company of the occurrence of one of these noted events.
The Company does not have any revenue expected to be recognized in the future related to remaining performance obligations or contracts with variable consideration related to undelivered performance obligations. There was no revenue recognized in the current period from performance obligations satisfied in previous periods.
Revenue per geographic location
10
Revenue generated was concentrated within the United States. For the three and six months ended June 30, 2024, the revenue generated within the United States was $
Contract Assets and Contract Liabilities
Contract assets represent the Company’s rights to consideration for work completed but not billed. As of June 30, 2024 and December 31, 2023, the Company had contract assets of $
Contract liabilities consist of fees invoiced or paid by the Company’s customers for which the associated services have not been performed and revenue has not been recognized based on the Company’s revenue recognition criteria described above. As of June 30, 2024 and December 31, 2023, the Company did
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company did
Accounts Receivable, net
The Company’s accounts receivable consists principally of uncollateralized amounts billed to customers. These receivables are generally due within 30 to 60 days of the period in which the corresponding sales or rentals occur and do not bear interest. They are recorded at net realizable value less an allowance for credit losses and are classified as accounts receivable, net on the unaudited condensed consolidated balance sheets.
Allowance for Credit Losses
The Company considers both current conditions and reasonable and supportable forecasts of future conditions when evaluating expected credit losses for uncollectible receivable balances. In our determination of the allowance for credit losses, we pool receivables by days outstanding and apply an expected credit loss percentage to each pool. The expected credit loss percentage is determined using historical loss data adjusted for current conditions and forecasts of future economic conditions. Current conditions considered include predefined aging criteria, as well as specified events that indicate the balance due is not collectible. Reasonable and supportable forecasts used in determining the probability of future collection consider publicly available macroeconomic data and whether future credit losses are expected to differ from historical losses.
As of June 30, 2024 and December 31, 2023, the allowance for credit losses totaled $
Business Combinations
The Company applies the acquisition method of accounting for business combinations, which requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets and liabilities acquired. We account for contingent assets and liabilities at fair value on the acquisition date, and record changes to fair value associated with these assets and liabilities as a period cost as incurred. We use established valuation techniques and engage reputable valuation specialists to assist us with these valuations. We use a reasonable measurement period to record any adjustment related to the opening balance sheet (generally, less than one year). After the measurement period, changes to the opening balance sheet can result in the recognition of income or expense as period costs. To the extent these items stem from contingencies that existed at the balance sheet date, but are contingent upon the realization of future events, the cost is charged to expense at the time the future event becomes known.
Inventories, net
Inventories are stated at the lower of cost or net realizable value. Cost is determined by using the specific identification method or the first-in-first-out ("FIFO") method, depending on the type of inventory. Inventory that is obsolete or in excess of forecasted usage is
11
written down to its net realizable value based on assumptions regarding future demand and market conditions. Inventory write-downs are charged to cost of rental revenue and cost of product sale revenue within operating costs section of the unaudited condensed consolidated statements of income and comprehensive income and establish a new cost basis for the inventory. Inventory includes raw material and finished goods.
Property, Plant and Equipment, net
Property, plant and equipment purchased by the Company are recorded at cost less accumulated depreciation. Depreciation is recorded using the straight-line method based on the estimated useful lives of the depreciable property or, for leasehold improvements, the remaining term of the lease, whichever is shorter. Assets not yet placed in use are not depreciated.
Property, plant and equipment acquired as part of a business acquisition is recorded at acquisition date fair value with subsequent additions at cost.
The cost of refurbishments and renewals are capitalized when the value of the property, plant or equipment is enhanced for an extended period. Expenditures to maintain and repair property, plant and equipment, which do not improve or extend the life of the related assets, are charged to operations when incurred. When property, plant and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operations.
Leases
The Company adopted ASC 842, Leases (“ASC 842”) as of January 1, 2022 using the modified retrospective transition approach, with no restatement of prior periods or cumulative adjustments to retained earnings. Upon adoption, the Company elected the package of transition practical expedients, which allowed it to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. The Company elected the use-of-hindsight to reassess lease term. The Company elected not to recognize leases with an initial term of 12 months or less within the unaudited condensed consolidated balance sheets and to recognize those lease payments on a straight-line basis in the unaudited condensed consolidated statements of income and comprehensive income over the lease term. The new lease accounting standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the practical expedient to not separate lease and non-lease components for all leases.
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and current operating lease liabilities and operating lease liabilities, net of current portion on the unaudited condensed consolidated balance sheets. The Company recognizes lease expense for its operating leases on a straight-line basis over the term of the lease.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from a lease. ROU assets and operating lease liabilities are recognized at the commencement date based on the present value of the future minimum lease payments over the lease term. Operating lease ROU assets also include the impact of any lease incentives. An amendment to a lease is assessed to determine if it represents a lease modification or a separate contract. Lease modifications are reassessed as of the effective date of the modification using an incremental borrowing rate based on the information available at the commencement date. For modified leases the Company also reassess the lease classification as of the effective date of the modification.
The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate because the interest rate implicit in the Company’s leases is not readily determinable. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located.
The Company’s lease terms include periods under options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option in the measurement of its ROU assets and liabilities. The Company considers contractual-based factors such as the nature and terms of the renewal or termination, asset-based factors such as physical location of the asset and entity-based factors such as the importance of the leased asset to the Company’s operations to determine the lease term. The Company generally uses the base, noncancelable, lease term when determining the ROU assets and lease liabilities. The right-of-use asset is tested for impairment in accordance with Accounting Standards Codification Topic 360, Property, Plant, and Equipment.
12
Lessor Accounting
Our leased equipment primarily consists of rental tools and equipment. Our agreements with our customers for rental equipment contain an operating lease component under ASC 842 because (i) there are identified assets, (ii) the customer has the right to obtain substantially all of the economic benefits from the use of the identified asset throughout the period of use and (iii) the customer directs the use of the identified assets throughout the period of use.
Our lease contract periods are daily, monthly, per well or based on footage. Lease revenue is recognized on a straight-line basis based on these rates. We do not provide an option for the lessee to purchase the rented tools at the end of the lease and the lessees do not provide residual value guarantees on the rented assets.
We recognized operating lease revenue within “Tool rental” on the unaudited condensed consolidated statements of income and comprehensive income.
Intangible Assets
Intangible assets with finite useful lives include customer relationships, trade name, patents, non-compete agreements and a supply agreement. These intangible assets are amortized either on a straight-line basis over the asset’s estimated useful life or on a basis that reflects the pattern in which the economic benefits of the intangible are realized.
Goodwill
Goodwill represents the excess of purchase price paid over the fair value of the net assets of acquired businesses. We evaluate Goodwill at least annually for impairment. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. We conduct our annual assessment of the recoverability of goodwill as of December 31 of each year. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the goodwill impairment test. If the qualitative assessment indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying amount or we elect not to perform a qualitative assessment, the quantitative assessment of goodwill test is performed. The goodwill impairment test is also performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If it is necessary to perform the quantitative assessment to determine if our goodwill is impaired, we will utilize a discounted cash flow analysis using management’s projections that are subject to various risks and uncertainties of revenues, expenses and cash flows as well as assumptions regarding discount rates, terminal value and control premiums. Estimates of future cash flows and fair value are highly subjective and inherently imprecise. These estimates can change materially from period to period based on many factors. Accordingly, if conditions change in the future, we may record impairment losses, which could be material to any particular reporting period.
Accounting for Impairment of Long-lived Assets
Long-lived assets with finite lives include property, plant and equipment and acquired intangible assets. The Company evaluates long-lived assets, including acquired intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds these estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group.
For the three and six months ended June 30, 2024 and 2023, management determined that there were no triggering events necessitating impairment testing of property, plant, and equipment or intangible assets.
Investments - Equity Securities
Equity securities are stated at fair value. Unrealized gains and losses are reflected in the unaudited condensed consolidated statements of income and comprehensive income. The Company periodically reviews the securities for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of the June 30, 2024 and December 31, 2023, the Company believes the cost of the securities was recoverable in all material respects.
Redeemable Convertible Preferred Stock
Prior to the closing of the Merger, there were outstanding shares of DTIH Series A redeemable convertible preferred stock ("Redeemable Convertible Preferred Stock"), which was classified outside of permanent equity in mezzanine equity on the unaudited condensed
13
consolidated balance sheets as it was redeemable on a fixed date.
Upon the closing of the Merger, all of the Redeemable Convertible Preferred Stock was canceled in exchange for DTIC common stock and the right to receive cash. Accordingly, there was
Preferred Stock
As of the closing of the Merger, the Board of Directors (the "Board") has expressly granted authority to issue shares of preferred stock, in one or more series, and to fix for each such series such voting powers, full or limited, and such designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as shall be stated and expressed in the resolution or resolutions adopted by the Board providing for the issue of such series and as may be permitted by the Delaware General Corporation Law. The number of authorized shares of preferred stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, without a separate vote of the holders of the preferred stock, or any series thereof, unless a vote of any such holders is required pursuant to any preferred stock designation.
The Board has t issued any shares of any classes or series of preferred stock as of June 30, 2024, and through the date these financial statements were available to be issued.
Cost of Revenue
The Company recorded all operating costs associated with its product sales and tool rental revenue streams in cost of product sale revenue and cost of tool rental revenue, respectively, in the unaudited condensed consolidated statements of income and comprehensive income. All indirect operating costs, including labor, freight, contract labor and others, are included in selling, general, and administrative expense in the unaudited condensed consolidated statements of income and comprehensive income.
Stock-Based Compensation
The Company recognizes stock-based compensation expenses over the requisite service period. The Company historically granted stock-based compensation awards with performance based vesting conditions. These options all vested upon the closing of the Merger with ROC. Subsequent to the closing of the merger with ROC, the Company’s stock-based compensation awards are subject only to service based vesting conditions. Pursuant to ASC 718-10-35-8, the Company recognizes compensation cost for stock awards with only service conditions that have a graded vesting schedule on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. ASC 718 requires that the cost of awards of equity instruments offered in exchange for employee services, including employee stock options and restricted stock awards, be measured based on the grant-date fair value of the award. The Company determines the fair value of stock options granted using the Black-Scholes-Merton option-pricing model (“Black-Scholes model”) and recognizes the cost over the period during which an employee is required to provide service in exchange for the award, generally the vesting period, net of estimated forfeitures. The Board considered numerous objective and subjective factors to determine the fair value of the Company’s common stock at each meeting in which awards were approved. The factors considered include, but were not limited to: (i) the results of contemporaneous independent third-party valuations of the Company’s common stock; (ii) the prices, rights, preferences, and privileges of the redeemable convertible preferred stock relative to those of its common stock; (iii) the lack of marketability of the Company’s common stock; (iv) actual operating and financial results; (v) current business conditions and projections; (vi) the likelihood of achieving a liquidity event, such as the sale of the Company, given prevailing market conditions; and (vii) precedent transactions involving the Company’s shares.
For restricted stock units, the grant date fair value is determined based on quoted market price for the Company's common stock as of the grant date and the grant date fair value of the awards are recognized as compensation cost as awards vest over the requisite service period.
Earnings Per Share
Basic earnings per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings is computed by adjusting net income (loss) to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted earnings is computed by dividing the diluted net income (loss) by the weighted-average number of common shares outstanding for the period, including potential dilutive common stock. For the purposes of this calculation, outstanding stock options and Redeemable Convertible Preferred Stock are considered potential dilutive common stock and are excluded from the computation of net loss per share if their effect is anti-dilutive.
The Redeemable Convertible Preferred Stock did not contractually entitle its holders to participate in profits or losses. As such, it was
14
not treated as a participating security in periods of net income or net loss.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the unaudited condensed consolidated financial statements and consist of taxes currently due plus deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities.
The Company is subject to state income taxes in various jurisdictions.
The Company follows guidance issued by the FASB in accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the unaudited condensed consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits and upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the unaudited condensed consolidated financial statements equals the largest amount that is greater than
The Company records income tax related interest and penalties, if applicable, as a component of the provision for income tax expense. However, there were
Derivative Financial Instruments
From time to time, the Company may enter into derivative instruments to manage exposure to interest rate fluctuations. During 2016, the Company entered into an interest swap agreement with respect to amounts outstanding under its revolving line of credit.
The Company’s interest rate swap is a pay-fixed, receive-variable interest rate swap based on SOFR swap rate. The SOFR swap rate is observable at commonly quoted intervals for the full term of the swap and therefore is considered a Level 2 item. For interest rate swaps in an asset position, the credit standing of the counterparty is analyzed and factored into the fair value measurement of the asset. The impact of the Company’s creditworthiness has also been factored into the fair value measurement of the interest rate swap in a liability position. For the three and six months ended June 30, 2023, the application of valuation techniques applied to similar assets and liabilities has been consistent.
This arrangement was designed to manage exposure to interest rate fluctuations by effectively exchanging existing obligations to pay interest based on floating rates for obligations to pay interest based on a fixed rate. These derivatives are marked-to-market at the end of each quarter and the realized/unrealized gain or loss is recorded as interest expense.
For the three and six months ended June 30, 2023, the Company recognized an unrealized gain due to the change in fair value of its interest rate swap of approximately $
15
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy contains three levels:
Level 1 – Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets.
Level 2 – Valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets and other observable inputs directly or indirectly related to the assets or liabilities being measured.
Level 3 – Valuation inputs are unobservable and significant to the fair value measurement.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are measured and reported on a fair value basis. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.
Asset and liabilities measured at fair value are summarized as follows (in thousands):
|
|
Assets at Fair Value as of June 30, 2024 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Investments, equity securities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total assets at fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Assets at Fair Value as of December 31, 2023 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Investments, equity securities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total assets at fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
As of June 30, 2024 and December 31, 2023, the Company did
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash, accounts receivable, and accounts payable. The carrying amount of such instruments approximates fair value due to their short-term nature.
16
Concentration of Credit Risk and Other Risks and Uncertainties
The Company’s customer concentration may impact its overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the oil and gas industry.
During the three months ended June 30, 2024 and 2023, the Company generated approximately
During the three and six months ended June 30, 2024, the Company did not have any vendors that represented over
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash. The Company maintains accounts in federally insured financial institutions in excess of federally insured limits. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which these deposits are held and of the money market funds in which these investments are made.
Operating Segment
Operating segments are identified as components of an enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker (“CODM”) in deciding resource allocation and assessing performance. The Company’s Chief Executive Officer and Chief Financial Officer work together as the CODM. The Company’s CODM reviews financial information presented on a consolidated basis for the purposes of making operations decisions, allocating resources and evaluating financial performance. Consequently, the Company has determined it operates in
Accounting Standards Issued But Not Yet Effective
In December 2023, FASB issued Accounting Standard Update (“ASU”) 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures, which requires enhanced income tax disclosures that reflect how operations and related tax risks, as well as how tax planning and operational opportunities, affect the tax rate and prospects for future cash flows. This standard is effective for the Company beginning January 1, 2025 with early adoption permitted. The Company is evaluating the effects of adopting this new accounting guidance on its disclosures but does not currently expect adoption will have a material impact on the Company’s consolidated financial statements. The Company does not intend to early adopt this ASU.
In November 2023, FASB issued ASU 2023-07, Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures, which includes requirements for more robust disclosures of significant segment expenses and measures of a segment’s profit and loss used in assessing performance. This standard is effective for the Company’s annual period beginning January 1, 2024 and interim periods beginning January 1, 2025 with early adoption permitted. The Company is still evaluating the effects of adopting this new accounting guidance on its disclosures.
17
NOTE 2 – BUSINESS COMBINATION
On the CTG Acquisition Date, the Company’s wholly owned subsidiary, Drilling Tools International, Inc., entered into and consummated the Share Purchase Agreement with CTG, the shareholders of CTG, and a representative of CTG, to acquire
The £
The CTG Acquisition has been accounted for as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”). Drilling Tools International, Inc. has been treated as the accounting acquirer. Accordingly, CTG’s tangible and identifiable intangible assets acquired and its liabilities assumed were recorded at their estimated fair values on the CTG Acquisition Date.
The preliminary allocation of the purchase is as follows:
Assets |
Preliminary March 15, 2024 |
|
|
Measurement Period Adjustments |
|
|
As adjusted March 15, 2024 |
|
|||
Cash |
$ |
|
|
|
|
|
$ |
|
|||
Accounts receivable, net |
|
|
|
|
|
|
|
|
|||
Inventories, net |
|
|
|
|
|
|
|
|
|||
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|||
Property, plant and equipment , net |
|
|
|
|
|
|
|
|
|||
Operating lease ROU asset |
|
|
|
|
|
|
|
|
|||
Intangible assets, net |
|
|
|
|
|
|
|
|
|||
Goodwill |
|
|
|
|
|
|
|
||||
Total assets acquired |
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|||
Liabilities |
|
|
|
|
|
|
|
|
|||
Accounts payable |
|
|
|
|
|
|
|
|
|||
Accrued expenses and other current liabilities |
|
( |
) |
|
|
|
|
|
|
||
Current portion of operating lease liabilities |
|
|
|
|
|
|
|
|
|||
Operating lease liabilities, less current portion |
|
|
|
|
|
|
|
|
|||
Total liabilities assumed |
$ |
|
|
$ |
|
|
$ |
|
|||
Total consideration transferred |
$ |
|
|
$ |
|
|
$ |
|
|||
The excess of the purchase price over the fair values of the net identifiable tangible and intangible assets acquired has been assigned to goodwill. Goodwill represents the future benefits as a result of the acquisition that will enhance the services available to both new and existing customers and increase the Company’s competitive position. Goodwill will be evaluated for impairment at least annually. Goodwill attributable to the CTG Acquisition is not deductible for tax purposes. During the three months ended June 30, 2024, a measurement period adjustment was identified as it relates to assumed accrued liabilities. The total measurement period adjustment was $
The following table sets forth the amounts allocated to the identified intangible assets, the estimated useful lives of those intangible assets as of the CTG Acquisition Date, and the methodologies used to determine the fair values of those intangible assets ($ in thousands):
18
|
|
|
|
|
Fair value |
|
Useful life |
Fair value methodology |
|
Intangible assets |
|
|
|
|
|
|
|
|
|
Trade names |
|
|
|
|
$ |
|
Relief from royalty method |
||
Developed Technology |
|
|
|
|
|
|
Relief from royalty method |
||
Customer relationships |
|
|
|
|
|
|
Multi-period excess earnings method of the income approach |
||
Total intangible assets |
|
|
|
|
$ |
|
|
|
|
The intangible assets acquired are expected to be amortized over their useful lives on a straight-line basis.
The Company incurred acquisition-related costs of $
The Company’s condensed consolidated statement of income and comprehensive income for the six months ended June 30, 2024 includes CTG’s revenues of $
Supplemental Pro Forma Information
The unaudited supplemental pro forma financial results below for the three and six months ended June 30, 2024 and 2023, combine the consolidated results of the Company and CTG, giving effect to the CTG Acquisition as if it had been completed on January 1, 2023. This unaudited supplemental pro forma financial information is presented for informational purposes only and is not indicative of future operations or results had the acquisition been completed as of January 1, 2023, or any other date.
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
(in thousands) |
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Pro forma revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Pro forma net income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The unaudited supplemental pro forma financial information in the table above contains material nonrecurring pro forma adjustments to remove interest expense on CTG's debt as it is assumed that the business combination occurred and the debt was paid off on January 1, 2023.
NOTE 3 – INVESTMENTS – EQUITY SECURITIES
The following table shows the cost and fair value of the Company’s investments in equity securities (in thousands):
|
|
Cost |
|
|
Unrealized |
|
|
Fair Value |
|
|||
June 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
Cost |
|
|
Unrealized |
|
|
Fair Value |
|
|||
December 31, 2023 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Unrealized holding gains on equity securities for the three months ended June 30, 2024 and 2023 were approximately $
19
NOTE 4 – BALANCE SHEET DETAILS - CURRENT ASSETS AND CURRENT LIABILITIES
Inventories, net
The following table shows the components of inventory (in thousands):
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Finished goods |
|
|
|
|
|
|
||
Total inventories |
|
|
|
|
|
|
||
Allowance for obsolete inventory |
|
|
( |
) |
|
|
( |
) |
Inventories, net |
|
$ |
|
|
$ |
|
||
Prepaid expenses and other current assets
The following table shows the components of prepaid expenses and other current assets (in thousands):
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Prepaid expenses: |
|
|
|
|
|
|
||
Deposits on inventory |
|
$ |
|
|
$ |
|
||
Prepaid income tax |
|
|
|
|
|
|
||
Prepaid insurance |
|
|
|
|
|
|
||
Prepaid rent |
|
|
|
|
|
|
||
Prepaid equipment |
|
|
|
|
|
|
||
Prepaid other |
|
|
|
|
|
|
||
Other current assets: |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Accrued expenses and other current liabilities
The following table shows the components of accrued expenses and other current liabilities (in thousands):
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Accrued expenses: |
|
|
|
|
|
|
||
Accrued compensation and related benefits |
|
$ |
|
|
$ |
|
||
Accrued insurance |
|
|
|
|
|
|
||
Accrued transaction advisory fees |
|
|
|
|
|
|
||
Accrued professional services |
|
|
|
|
|
|
||
Accrued interest |
|
|
|
|
|
|
||
Accrued property taxes |
|
|
|
|
|
|
||
Accrued monitoring fees |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Other current liabilities: |
|
|
|
|
|
|
||
Income tax payable |
|
$ |
|
|
$ |
|
||
Sales tax payable |
|
|
( |
) |
|
|
|
|
Unbilled lost-in-hole revenue |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
Total accrued expenses and other current liabilities |
|
$ |
|
|
$ |
|
||
20
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
The following table shows the component of property, plant and equipment, net (in thousands):
|
|
Estimated Useful |
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Rental tools and equipment |
|
|
|
|
|
|
|
|||
Buildings and improvements |
|
|
|
|
|
|
|
|||
Office furniture, fixtures and equipment |
|
|
|
|
|
|
|
|||
Transportation and equipment |
|
|
|
|
|
|
|
|||
Total property, plant and equipment |
|
|
|
|
|
|
|
|
||
Less: accumulated deprecation |
|
|
|
|
( |
) |
|
|
( |
) |
Property, plant and equipment, net (excluding construction in progress) |
|
|
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
|
|
||
Property, plant and equipment, net |
|
|
|
$ |
|
|
$ |
|
||
Total depreciation expense for the three months ended June 30, 2024 and 2023 was approximately $
Property, plant and equipment, net, were concentrated within the U.S. As of June 30, 2024 and December 31, 2023, property, plant and equipment, net held within the U.S was $
NOTE 6 – INTANGIBLE ASSETS, NET
The following table shows the components of intangible assets, net (in thousands):
|
|
Useful Lives (in Years) |
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Trade name |
|
|
$ |
|
|
$ |
|
|||
Developed Technology |
|
|
|
|
|
|
|
|||
Customer Relationships |
|
|
|
|
|
|
|
|||
Total intangible assets |
|
|
|
|
|
|
|
|
||
Less: accumulated amortization |
|
|
|
|
( |
) |
|
|
( |
) |
Intangible assets, net |
|
|
|
$ |
|
|
$ |
|
||
Total amortization expense for the three months ended June 30, 2024 and 2023 was approximately $
NOTE 7 – REVOLVING CREDIT FACILITY AND TERM LOAN
In December 2015, the Company entered into a credit facility with PNC Bank, National Association (the "Existing Credit Facility"). The facility provided for a revolving line of credit with a maximum borrowing amount totaling $
On March 15, 2024, the Company refinanced its revolving credit facility (the “Refinancing”) by entering into a Second Amended and Restated Revolving Credit, Term Loan and Security and Guaranty Agreement (the “Credit Facility”) with certain of the Company’s subsidiaries and PNC Bank, National Association as lender and as agent. Pursuant to the terms of the Credit Facility, the Company will be provided a revolving line of credit in a principal amount up to $
21
the Company’s Existing Credit Facility under that certain Amended and Restated Revolving Credit, Term Loan, and Security Agreement, dated as of June 20, 2023, by and among the Company, certain of its subsidiaries, and PNC Bank National Association.
For the three and six months ended June 30, 2024, the interest on the amount drawn on the Credit Facility and the outstanding Term Loan balance are based on the Secured Overnight Financing Rate ("SOFR") or the bank’s base lending rate plus applicable margin (approximately
As of June 30, 2024, there were
The Company is subject to various restrictive covenants associated with these borrowings including, but not limited to, a fixed charge ratio and a minimum amount of undrawn availability. As of June 30, 2024, the Company was in compliance with all restrictive covenants.
Contingent Interest Embedded Derivative Liability
Under the Credit Facility Agreement, the interest rate will reset (the "Default Rate") upon the event of a default and an additional
The Default Rate Derivative is treated as a liability, initially measured at fair value with subsequent changes in fair value recorded in earnings. Management has assessed the probability of occurrence for a non-credit default event and determined the likelihood of a referenced event to be remote. Therefore, the estimated fair value of the Default Rate Derivative was negligible as of June 30, 2024 and December 31, 2023 and therefore no amounts were recorded as of June 30, 2024 or December 31, 2023.
NOTE 8 – INCOME TAXES
The Company recorded an income tax benefit and expense on the unaudited condensed consolidated statements of income and comprehensive income of $
The income tax expense for the six months ended June 30, 2024 was calculated using a discrete approach. This methodology was used because changes in the Company's results of operations and acquisitions can materially impact the estimated annual effective tax rate. The Company’s effective tax rate for the six months ended June 30, 2024 and 2023 were provisions of
The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized, for tax purposes, in the foreseeable future. There was
The Company is still evaluating the tax impact of the CTG Acquisition, including the impact of the transaction costs. Additionally, the Company continues to evaluate the deferred tax assets and liabilities and corresponding valuation allowance in connection with the CTG Acquisition.
22
NOTE 9 – STOCK-BASED COMPENSATION
On June 20, 2023, the Company adopted the Drilling Tools International Corporation 2023 Omnibus Incentive Plan (the "2023 Plan"). The 2023 Plan became effective on the closing of the Merger. The 2023 Plan provides for the issuance of shares of Common Stock up to ten percent (
Stock Options
In connection with the Merger, all outstanding options to purchase shares of DTIH common stock were canceled and exchanged for options to purchase shares of DTIC Common Stock ("Company Options"). The number of Company Options issued and the associated exercise prices were adjusted using the Common Exchange Ratio used for the Merger. As a result of the Merger, the Company issued options to purchase a total of
The fair value of each stock option award is estimated on the date of grant using a Black-Scholes model. Expected volatilities are based on comparable public company data. The Company uses future estimated employee termination and forfeiture rates of the options within the valuation model. The expected term of options granted is derived using the “plain vanilla” method due to the lack of history and volume of option activity at the Company. The risk-free rate is based on the approximate U.S. Treasury yield rate in effect at the time of grant. The Company’s calculation of share price involves the use of different valuation techniques, including a combination of an income and market approach. For any grants of stock options subsequent to the Company being publicly traded, the Company will use the quoted market price as of the grant date as an input into the Black-Scholes model.
During the three and six months ended June 30, 2023, there were
During the three and six months ended June 30, 2023, the Company recognized $
During the three and six months ended June 30, 2023, the Company recognized $
The following table summarizes our stock option activity for the six months ended June 30, 2024:
23
|
|
Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Life (in Years) |
|
|
Aggregate Intrinsic Value |
|
||||
OUTSTANDING, December 31, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Exercised |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Forfeited |
|
|
|
|
$ |
|
|
|
— |
|
|
|
— |
|
||
OUTSTANDING, June 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
UNVESTED, June 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
EXERCISABLE, June 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
During the three months ended June 30, 2024, the Company recognized $
Restricted Stock Units
In May 2024, the Company issued an aggregate
During the three and six months ended June 30, 2024, the Company recognized $
NOTE 10 – OTHER EXPENSES, NET
The following table shows the components of other expenses, net for the three months ended June 30, 2024 and 2023 (in thousands):
|
|
Three months ended June 30, 2024 |
|
|
Three months ended June 30, 2023 |
|
||
Transaction fees |
|
|
( |
) |
|
|
( |
) |
HHLLC stock-based compensation |
|
|
|
|
|
( |
) |
|
Interest income |
|
|
|
|
|
|
||
Other, net |
|
|
|
|
|
( |
) |
|
Other expense, net |
|
$ |
( |
) |
|
$ |
( |
) |
The following table shows the components of other expenses, net for the six months ended June 30, 2024 and 2023 (in thousands):
|
|
Six Months Ended June 30, 2024 |
|
|
Six Months Ended June 30, 2023 |
|
||
Transaction fees |
|
|
( |
) |
|
|
( |
) |
HHLLC stock-based compensation |
|
|
|
|
|
( |
) |
|
Other, net |
|
|
|
|
|
( |
) |
|
Interest income |
|
|
|
|
|
|
||
Other expense, net |
|
$ |
( |
) |
|
$ |
( |
) |
24
NOTE 11 – RELATED PARTY TRANSACTIONS
Management fees
For the three months ended June 30, 2024 and 2023, management fees paid to Hicks Holdings Operating LLC ("HHLLC"), a shareholder of the Company, were approximately $
Director fees
Director fees For the three months ended June 30, 2024 and 2023, director fees paid to Board were approximately $
Leases
For the three months ended June 30, 2024 and 2023, the Company paid rent to Cree Investments, LLC, a shareholder of the Company, of approximately $
Promissory Notes
Upon consummation of the Merger, the Company issued shares of DTIC Common Stock in connection with the PIPE Financing to payoff convertible promissory notes which were issued to an affiliate of the ROC Sponsor on December 6, 2022 and March 2, 2023. The notes did not bear interest and were in the amounts of $
Working Capital Loan
Prior to the Merger, ROC paid the remaining outstanding principal amount owed to an affiliate of the ROC Sponsor in the amount of $
NOTE 12 – LEASES
For the three and six months ended June 30, 2024, the components of the Company’s lease expense were as follows (in thousands):
|
|
Three months ended June 30. 2024 |
|
|
Three months ended June 30. 2023 |
|
||
Operating Lease Cost |
|
$ |
|
|
$ |
|
||
Short-term Lease Cost |
|
|
|
|
|
|
||
Variable Lease Cost |
|
|
|
|
|
|
||
Sublease Income |
|
|
|
|
|
( |
) |
|
Total Lease Cost |
|
$ |
|
|
$ |
|
||
25
|
|
Six months ended June 30, 2024 |
|
|
Six months ended June 30, 2023 |
|
||
Operating Lease Cost |
|
$ |
|
|
$ |
|
||
Short-term Lease Cost |
|
|
|
|
|
|
||
Variable Lease Cost |
|
|
|
|
|
|
||
Sublease Income |
|
|
|
|
|
( |
) |
|
Total Lease Cost |
|
$ |
|
|
$ |
|
||
Supplemental balance sheet information related to leases was as follows (in thousands):
|
|
Six months ended June 30, 2024 |
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years) |
|
|
|
|
Weighted average discount rate |
|
|
% |
|
|
|
Six months ended |
|
|
|
|
June 30, 2024 |
|
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
Future undiscounted cash flows for each of the next five years and thereafter and reconciliation to the lease liabilities recognized on the unaudited condensed consolidated balance sheet as of June 30, 2024 were as follows (in thousands):
|
|
|
|
|
2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total lease payments |
|
$ |
|
|
Less: imputed interest |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
|
The Company leases downhole drilling tools to companies in the oil and natural gas industry. Such leases are accounted for in accordance with ASC 842. For the three and six months ended June 30, 2024, tool rental revenue was approximately $
26
NOTE 13 – EMPLOYEE BENEFITS
The Company has a defined contribution plan that complies with Section 401(k) of the Internal Revenue Code.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
The Company maintains operating leases for various facilities and vehicles. See Note 12 - Leases, for further information.
Litigation
From time to time, the Company may become involved in various legal proceedings in the ordinary course of its business and may be subject to third-party infringement claims.
In the normal course of business, the Company may agree to indemnify third parties with whom it enters into contractual relationships, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that the Company’s products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim.
Management Fee
The Company is required to pay a monthly management fee to a shareholder. The fee is based upon a percentage of the Company’s trailing twelve months, earnings before interest, taxes and accumulated depreciation amount, as defined in the management agreement (refer to Note 11 – Related Parties Transactions).
NOTE 15 – EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding for the period plus dilutive potential common shares, including performance share awards, using the treasury stock method. Performance share awards are included based on the number of shares that would be issued as if the end of the reporting period was the end of the performance period and the result was dilutive.
27
The following table sets forth the computation of the Company’s basic and diluted net earnings per share for the three and six months ended June 30, 2024 and 2023 (in thousands except share and per share data):
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Less: Redeemable Convertible Preferred Stock dividends |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Net income attributable to common shareholders — basic |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Add: Redeemable Convertible Preferred Stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income attributable to common shareholders — diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares used in computing |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average effect of potentially dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of potentially dilutive time-based stock options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of potentially dilutive performance-based stock options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of potentially dilutive restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of potentially dilutive redeemable convertible |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares outstanding — diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share — basic |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Earnings per share — diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
As of June 30, 2024, the Company’s potentially dilutive securities consisted of options to purchase common stock. Based on the amounts outstanding as of the three and six months ended June 30, 2024 and 2023, the Company excluded the following potential common shares from the computation of diluted net income per share because including them would have had an anti-dilutive effect:
|
|
Three months ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Time-based options outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
NOTE 16 – SUBSEQUENT EVENTS
Acquisition of Superior Drilling Products, Inc.
On August 1, 2024, the Company announced the closing (the “SDPI Closing”) of the acquisition of Superior Drilling Products, Inc. (“SDPI”) pursuant to the Agreement and Plan of Merger, dated March 6, 2024 (the “Merger Agreement”), by and among the Company, SDPI, DTI Merger Sub I, Inc., a Delaware corporation and direct wholly owned subsidiary of the Company, and Merger DTI Merger Sub II, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“Merger Sub II”), pursuant to which Merger Sub I merged with and into SDPI (the “First Merger”), with SDPI surviving as a wholly owned subsidiary of DTI and upon the effective time of the First Merger (the “First Effective Time”), SDPI, as the surviving corporation of the First Merger, merged with and into Merger Sub II (the “Second Merger,” and together with the First Merger, the “Merger”), with Merger Sub II surviving as a wholly owned subsidiary of the Company. In connection with the Closing, the Company issued (i) $
28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of June 30, 2024, and for the three months ended June 30, 2024 and 2023, included elsewhere herein. For additional information pertaining to our business, including risk factors which should be considered before investing in our common stock, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. All dollar amounts are expressed in thousands of United States (“U.S.”) dollars (“$”), unless otherwise indicated. Capitalized terms used in this section, but not otherwise defined, have the meanings ascribed to them in the Report.
Overview
We are a global oilfield services company that designs, engineers, manufactures and provides a differentiated, rental-focused offering of tools for use in onshore and offshore horizontal and directional drilling operations, as well as other cutting-edge solutions across the well life cycle. We now operate from 16 service and support centers across North America and maintains 10 international service and support centers across the Europe, Middle East, and Africa ("EMEA") regions and Asia-Pacific ("APAC") regions.
Our business model primarily centers on revenue generated from tool rentals and product sales. We generated revenue from total tool rentals and product sales of $37.5 million and $37.9 million for the three months ended June 30, 2024 and 2023, respectively, and had net income of $0.4 million and $0.9 million for those same periods. Additionally, we generated revenue from tool rentals and product sales of $74.5 million and $78.7 million for the six months ended June 30, 2024 and 2023, respectively, and had net income of $3.5 million and $6.6 million for those same periods, respectively. As of June 30, 2024, we had cash and cash equivalents of $6.8 million, and an accumulated deficit of $3.1 million.
We believe our future financial performance will be driven by continued investment in oil and gas drilling following years of industry underinvestment.
Market Factors
Demand for our services and products depends primarily upon the general level of activity in the oil and gas industry, including the number of active drilling rigs, the number of wells drilled, the depth and working pressure of these wells, the number of well completions, the level of well remediation activity, the volume of production and the corresponding capital spending by oil and natural gas companies. Oil and gas activity is in turn heavily influenced by, among other factors, investor sentiment, availability of capital and oil and gas prices locally and worldwide, which have historically been volatile.
Our tool rental revenues are primarily dependent on drilling activity and our ability to gain or maintain market share with a sustainable pricing model.
Our product sales revenues are primarily dependent on oil and gas companies paying for tools that are lost or damaged in their drilling programs as well as the customers need to replace aging or consumable products and our ability to provide competitive pricing.
All of these factors may be influenced by the oil and gas region in which our customers are operating. While these factors may lead to differing revenues, we have generally been able to forecast our product needs and anticipated revenue levels based on historic trends in a given region and with a specific customer.
Recent Developments and Trends
Industry Update
In the first half of 2024, the oil and gas market witnessed a dynamic interplay of geopolitical tensions, supply concerns, and global demand fluctuations. Crude oil prices remained volatile, with benchmarks such as Brent and WTI experiencing fluctuations driven by a multitude of factors. Geopolitical tensions in key oil-producing regions, such as the Middle East, continued to influence market sentiment, leading to sporadic spikes in prices. Additionally, concerns over supply disruptions, particularly amidst conflicts and geopolitical uncertainties, added to the market’s unease. As the global market for crude oil has continued its recovery, technical recessions, specifically in China, have slowed progress and created fluctuations in global demand. As of June 30, 2024, the WTI oil price was approximately $83.29 per barrel.
Despite the high volatility in spot oil prices described above, our customers tend to be more focused on medium-term and long term commodity prices when making investment decisions due to the longer lead times for offshore projects. These forward prices
29
experienced far less volatility in 2022 and 2023 and have maintained levels in 2024 which are highly constructive for offshore project demand.
Prices for natural gas have decreased somewhat throughout the first half of 2024 relative to the fourth quarter of 2023 in the U.S. due to several factors, including a mild winter in key consuming regions and increased production and availability, both of which led to an oversupply in the market. Additionally, constrained storage capacity and delivery delays resulted in uncertainty around liquified natural gas exports in the U.S.
Henry Hub natural gas spot prices have increased from an average of $2.18 per one million British Thermal Units (“MMBtu”) in June 2023 to $2.53 per MMBtu in June 2024.
The ongoing conflict in Ukraine and the evolving Israel-Hamas conflict have caused uncertainty in the oil and natural gas markets, and the financial markets, both globally and in the U.S. Such uncertainty already has and could continue to cause stock price volatility and supply chain disruptions as well as higher oil and natural gas prices. These could result in higher inflation worldwide, impact consumer spending and negatively impact demand for our goods and services. Moreover, additional interest rate increases by the U.S. Federal Reserve to combat inflation could further increase the probability of a recession.
Notwithstanding the significant commodity price volatility over the past several years, we have seen decreases in U.S. onshore drilling activity. During the three and six months ended June 30, 2024, the weekly average U.S. onshore rig count as reported by Baker Hughes was 583 and 592 rigs, respectively, compared to 698 and 720 rigs for the three and six months ended June 30, 2023, respectively. Current rig activity remains significantly improved from 2020 levels when the weekly average rig count for the year ended December 31, 2020 was 417.
Inflation and Increased Costs
We are experiencing the impacts of global inflation, both in increased personnel costs and the prices of goods and services required to operate our rigs and execute capital projects. While we are currently unable to estimate the ultimate impact of rising prices, we do expect that our costs will continue to rise in the near term and will impact our profitability.
How We Evaluate Our Operations
We use a number of financial and operational measures to routinely analyze and evaluate the performance of our business, including revenue, net and non-GAAP measures Adjusted EBITDA and Free Cash Flow.
Revenue, net
We analyze our performance by comparing actual monthly revenue to revenue trends and revenue forecasts by product line as well as tool activity trends for each month. Our revenue is primarily derived from tool rental and product sales.
Adjusted EBITDA
We regularly evaluate our financial performance using Adjusted EBITDA. Our management believes Adjusted EBITDA is a useful financial performance measure as it excludes non-cash charges and other transactions not related to our core operating activities and allows more meaningful analysis of the trends and performance of our core operations.
Free Cash Flow
Beginning in the first quarter of fiscal year 2024, we revised our presentation of non-GAAP measures to exclude the presentation of free cash flow in alignment with industry practices and to enhance comparability with our peers. The Company has determined that GAAP disclosures regarding the Company’s liquidity and capital resources, in the form provided in the Company’s recent periodic reports and without further enhancement through the inclusion of non-GAAP free cash flow information, provide investors with sufficient information on the Company’s cash available for investments, acquisitions, and working capital requirements.
Please refer to the section titled “Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial performance measure calculated and presented in accordance with GAAP and a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable liquidity measure calculated and presented in accordance with U.S GAAP.
30
Key Components of Results of Operations
The discussion below relating to significant line items from our interim unaudited consolidated statements of income and comprehensive income are based on available information and represent our analysis of significant changes or events that impact the comparability of the reported amount. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, we have quantified the impact of such items.
Revenue, net
We currently generate our revenue, net from tool rental services and product sales. Tool rental services consist of rental services, inspection services, and repair services is accounted for in accordance Topic 842. We recognize revenues from renting tools on a straight-line basis. Our rental contract periods are daily, monthly, per well, or based on footage. As part of this straight-line methodology, when the equipment is returned, we recognize as incremental revenue the excess, if any, between the amount the customer is contractually required to pay, which is based on the rental contract period applicable to the actual number of days the drilling tool was out on rent, over the cumulative amount of revenue recognized to date.
The rental tool recovery component of product sales revenue is recognized when a tool is deemed to be lost-in-hole, damaged-beyond-repair, or lost-in-transit while in the care, custody, or control of the customer. Other made to order product sales revenue is recognized when the product is made available to the customer for pickup at our shipping dock.
We expect our tool rental services revenue to increase over time as a function of an increase in drilling activity, customer pricing, and market share.
We expect that product sales revenue will increase as aged and consumable products will continue to be replaced in order to maintain or increase capacity. Additionally, product sale focused acquisitions are expected to further increase product sale revenue.
Costs and Expenses
Our costs and expenses consist of cost of revenue, selling, general, and administrative expense, and depreciation and amortization expense.
Cost of Revenue
Our cost of revenue consists primarily of all direct and indirect expenses related to providing our tool rental services offering and delivering our product sales, including personnel-related expenses and costs associated with maintaining the facilities.
We expect our total cost of tool rental revenue and our total cost of product sale revenue to increase in absolute dollars in future periods, corresponding to our anticipated growth in revenue and employee headcount to support our customers and to maintain the manufacturing, operations and field service team with some expected cost inflation.
We expect that gross margins will continue to improve slightly as we leverage our existing cost structure to support an increase in our business activity. In addition, we expect that customer price increases will help offset cost inflation.
Selling, General and Administrative
General and administrative expenses consist primarily of personnel-related expenses, including salaries, benefits and stock-based compensation for personnel and outside professional services expenses including legal, audit and accounting services, insurance, other administrative expenses and allocated facility costs for our administrative functions.
We expect our operating expenses to increase in absolute dollars for the foreseeable future as a result of operating as a public company. In particular, we expect our legal, accounting, tax, personnel-related expenses and directors’ and officers’ insurance costs reported within general and administrative expense to increase as we establish more comprehensive compliance and governance functions, increased security and IT compliance, review internal controls over financial reporting in accordance with the Sarbanes-Oxley Act of 2002, as amended, and prepare and distribute periodic reports as required by the rules and regulations of the U.S. Securities and Exchange Commission. As a result, our historical results of operations may not be indicative of our results of operations in future periods.
Selling expenses consist primarily of personnel-related expenses, including salaries, benefits and stock-based compensation for personnel, direct advertising, marketing and promotional material costs, sales commission expense, consulting fees and allocated facility costs for our sales and marketing functions.
31
We intend to increase investments in our sales and marketing organization to drive additional revenue, expand our global customer base, and broaden our brand awareness. We expect our sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future.
Depreciation and amortization expense
Depreciation and amortization expense relates to the consumption of our property and equipment, which consists of rental tools, shop equipment, computer equipment, furniture and fixtures and leasehold improvements, and the amortization of our intangible assets mainly related to customer relationships, software and partnerships.
Other income (expense), net
Our other income (expense), net is primarily comprised of interest income (expense), gain on sale of property, unrealized gain (loss) on securities, and other miscellaneous income and expense unrelated to our core operations.
Results of Operations
The following table set forth our results of operations for the periods presented (in thousands):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenue, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Tool rental |
|
$ |
28,328 |
|
|
$ |
29,002 |
|
|
$ |
58,294 |
|
|
$ |
61,278 |
|
Product sale |
|
|
9,205 |
|
|
|
8,906 |
|
|
|
16,213 |
|
|
|
17,429 |
|
Total revenue, net |
|
|
37,533 |
|
|
|
37,908 |
|
|
|
74,507 |
|
|
|
78,707 |
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of tool rental revenue |
|
|
7,454 |
|
|
|
7,692 |
|
|
|
14,455 |
|
|
|
15,829 |
|
Cost of product sale revenue |
|
|
2,544 |
|
|
|
1,157 |
|
|
|
4,080 |
|
|
|
2,460 |
|
Selling, general, and administrative expense |
|
|
19,619 |
|
|
|
17,718 |
|
|
|
37,560 |
|
|
|
34,447 |
|
Depreciation and amortization expense |
|
|
5,681 |
|
|
|
4,717 |
|
|
|
11,047 |
|
|
|
9,732 |
|
Total costs and expenses |
|
|
35,298 |
|
|
|
31,284 |
|
|
|
67,142 |
|
|
|
62,468 |
|
Operating Income |
|
|
2,235 |
|
|
|
6,624 |
|
|
|
7,365 |
|
|
|
16,239 |
|
Other expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
(811 |
) |
|
|
(348 |
) |
|
|
(992 |
) |
|
|
(922 |
) |
Gain (loss) on sale of property |
|
|
51 |
|
|
|
(1 |
) |
|
|
42 |
|
|
|
68 |
|
Unrealized gain (loss) on equity securities |
|
|
480 |
|
|
|
420 |
|
|
|
729 |
|
|
|
387 |
|
Other income (expense), net |
|
|
(1,672 |
) |
|
|
(4,382 |
) |
|
|
(2,798 |
) |
|
|
(6,035 |
) |
Total other expense, net |
|
|
(1,952 |
) |
|
|
(4,311 |
) |
|
|
(3,019 |
) |
|
|
(6,502 |
) |
Income before income taxes |
|
|
283 |
|
|
|
2,313 |
|
|
|
4,346 |
|
|
|
9,737 |
|
Income tax expense |
|
|
82 |
|
|
|
(1,376 |
) |
|
|
(854 |
) |
|
|
(3,099 |
) |
Net income |
|
$ |
365 |
|
|
$ |
937 |
|
|
$ |
3,492 |
|
|
$ |
6,638 |
|
Comparison of the Three Months Ended June 30, 2024 and 2023
Revenue, net
Our revenue, net consists of tool rental and product sale revenues.
|
|
Quarters Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Tool rental |
|
$ |
28,328 |
|
|
$ |
29,002 |
|
|
$ |
(674 |
) |
|
|
(2 |
)% |
Product sale |
|
$ |
9,205 |
|
|
$ |
8,906 |
|
|
$ |
299 |
|
|
|
3 |
% |
Tool rental revenue decreased $0.7 million, or (2)%, to $28.3 million for the three months ended June 30, 2024 as compared to $29.0 million for the three months ended June 30, 2023. The decrease was primarily driven by decreased market activity in relation to our Directional Tool Rentals (“DTR”) division, the revenue of which decreased $2.5 million. The decrease was partially offset by an increase in our Premium Tools Division ("PTD"), the revenue of which increased $1.0 million, our Wellbore Optimization Tools ("WOT") Division, the revenue of which increased $0.5 million, and the addition of Deep Casing, which added rental revenue of $0.3 million for the three months ended June 30, 2024.
32
Product sale revenue increased $0.3 million, or 3%, to $9.2 million for the three months ended June 30, 2024 as compared to $8.9 million for the three months ended June 30, 2023. The increase by additional product sales as it relates to Deep Casing which was acquired in March 2024. This increase was partially offset by lower tool recovery revenue for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.
Costs and Expenses
Cost of revenue
Our cost of revenue consists of cost of tool rental revenue and cost of product sale revenue.
|
|
Quarters Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Cost of tool rental revenue |
|
$ |
7,454 |
|
|
$ |
7,692 |
|
|
$ |
(238 |
) |
|
|
(3 |
)% |
Cost of product sale revenue |
|
$ |
2,544 |
|
|
$ |
1,157 |
|
|
$ |
1,387 |
|
|
|
120 |
% |
Cost of tool rental revenue decreased $0.2 million, or (3)%, to $7.5 million for the three months ended June 30, 2024 as compared to $7.7 million for the for the three months ended June 30, 2023. The decrease in cost of tool rental revenue was primarily driven by a decrease in labor cost and repairs cost due to the decrease in rental activity.
Cost of product sale revenue increased $1.4 million, or 120%, to $2.5 million for the three months ended June 30, 2024 as compared to $1.2 million for the for the three months ended June 30, 2023. The increase in cost of product sale revenue was primarily driven by additional cost of product sales from Deep Casing, offset by a decrease in cost of product sales associated with tool recovery.
Selling, General, and Administrative Expense
|
|
Quarters Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Selling, general, and administrative expense |
|
$ |
19,619 |
|
|
$ |
17,718 |
|
|
$ |
1,901 |
|
|
|
11 |
% |
Selling, general, and administrative expense increased $1.9 million, or 11%, to $19.6 million for the three months ended June 30, 2024 as compared to $17.7 million for the three months ended June 30, 2023. This increase was primarily driven by an increase in personnel related fees and other costs associated with the public company transition. No other driver of this increase was significant.
Depreciation and Amortization expense
|
|
Quarters Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Depreciation and amortization expense |
|
$ |
5,681 |
|
|
$ |
4,717 |
|
|
$ |
964 |
|
|
|
20 |
% |
Depreciation and amortization expenses increased $1.0 million, or 20%, to $5.7 million for the three months ended June 30, 2024 as compared to $4.7 million for the three months ended June 30, 2023. The increase was primarily due an increase in depreciation expense resulting from a higher property, plant and equipment balance as of June 30, 2024.
Other expense, net
Interest Expense, net
|
|
Quarters Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Interest expense, net |
|
$ |
(811 |
) |
|
$ |
(348 |
) |
|
$ |
463 |
|
|
|
133 |
% |
Interest expense increased $463 thousand, or 133%, to $0.8 million for the three months ended June 30, 2024 as compared to $0.3 million for the three months ended June 30, 2023. The increase was primarily due to an increase in interest expense on the term loan entered into in March 2024.
33
Unrealized Gain on Equity Securities
|
|
Quarters Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Unrealized gain on equity securities |
|
$ |
480 |
|
|
$ |
420 |
|
|
$ |
60 |
|
|
|
14 |
% |
Unrealized gain on equity securities increased by $0.1 million, or 14%, to $0.5 million for the three months ended June 30, 2024 as compared to $0.4 million for the three months ended June 30, 2023 primarily due to favorable market valuations in the second quarter of 2024 as compared to the second quarter of 2023.
Other Expense, net
|
|
Quarters Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Other expense, net |
|
$ |
(1,672 |
) |
|
$ |
(4,382 |
) |
|
$ |
(2,710 |
) |
|
|
(62 |
)% |
Other expense for the three months ended June 30, 2024 was $1.7 million, a decrease of $2.7 million, or (62)%, compared to the three months ended June 30, 2023. The decrease was primarily due to increased transaction costs related to the completion of the merger with ROC Energy Acquisition in June 2023.
Comparison of the Six Months Ended June 30, 2024 and 2023
Revenue, net
Our revenue, net consists of tool rental and product sale revenues.
|
|
Six Months Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Tool rental |
|
$ |
58,294 |
|
|
$ |
61,278 |
|
|
$ |
(2,984 |
) |
|
|
(5 |
)% |
Product sale |
|
$ |
16,213 |
|
|
$ |
17,429 |
|
|
$ |
(1,216 |
) |
|
|
(7 |
)% |
Tool rental revenue decreased $3.0 million, or (5)%, to $58.3 million for the six months ended June 30, 2024 as compared to $61.3 million for the six months ended June 30, 2023. The decrease was primarily driven by decreased market activity across certain divisions, especially in relation to our DTR division, the revenue of which decreased $4.0 million and our PTD division, the revenue of which decreased $1.0 million. These decreases were offset by increases at our WOT division, the revenue of which increased by $2.0 million.
Product sale revenue decreased $1.2 million, or (7)%, to $16.2 million for the six months ended June 30, 2024 as compared to $17.4 million for the six months ended June 30, 2023. The decrease was primarily driven by higher than average rental tool recovery events in the six months ended June 30, 2023, partially offset by additional product sales at Deep Casing for the six months ended June 30, 2024.
Costs and Expenses
Cost of revenue
Our cost of revenue consists of cost of tool rental revenue and cost of product sale revenue.
|
|
Six Months Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Cost of tool rental revenue |
|
$ |
14,455 |
|
|
$ |
15,829 |
|
|
$ |
(1,374 |
) |
|
|
(9 |
)% |
Cost of product sale revenue |
|
$ |
4,080 |
|
|
$ |
2,460 |
|
|
$ |
1,620 |
|
|
|
66 |
% |
Cost of tool rental revenue decreased $1.4 million, or (9)%, to $14.5 million for the six months ended June 30, 2024 as compared to $15.8 million for the for the six months ended June 30, 2023. The decrease in cost of tool rental revenue was primarily driven by a decrease in labor cost and repairs cost due to the decrease in rental activity.
34
Cost of product sale revenue increased $1.6 million, or 66%, to $4.1 million for the six months ended June 30, 2024 as compared to $2.5 million for the for the six months ended June 30, 2023. The increase in cost of product sale revenue was primarily driven by additional cost of product sales from Deep Casing, offset by a decrease in cost of product sales associated with tool recovery.
Selling, General, and Administrative Expense
|
|
Six Months Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Selling, general, and administrative expense |
|
$ |
37,560 |
|
|
$ |
34,447 |
|
|
$ |
3,113 |
|
|
|
9 |
% |
Selling, general, and administrative expense increased $3.1 million, or 9%, to $37.6 million for the six months ended June 30, 2024 as compared to $34.4 million for the six months ended June 30, 2023. This increase was primarily driven by an increase in personnel related fees and other costs associated with the public company transition. No other driver of this increase was significant.
Depreciation and Amortization expense
|
|
Six Months Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Depreciation and amortization expense |
|
$ |
11,047 |
|
|
$ |
9,732 |
|
|
$ |
1,315 |
|
|
|
14 |
% |
Depreciation and amortization expenses increased $1.3 million, or 14%, to $11.0 million for the six months ended June 30, 2024 as compared to $9.7 million for the six months ended June 30, 2023. The increase was primarily due to an increase in depreciation expense resulting from a higher property, plant and equipment balance as of June 30, 2024.
Other (expense) income
Interest Expense, net
|
|
Six Months Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Interest expense, net |
|
$ |
(992 |
) |
|
$ |
(922 |
) |
|
$ |
(70 |
) |
|
|
(8 |
)% |
For the six months ended June 30, 2024 we had interest expense of $1.0 million as compared to interest expense of $0.9 million for the six months ended June 30, 2023. This change of $0.1 million or 8% was primarily due to additional interest charges on the Term Loan entered into during 2024.
Unrealized Gain on Equity Securities
|
|
Six Months Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Unrealized gain on equity securities |
|
$ |
729 |
|
|
$ |
387 |
|
|
$ |
342 |
|
|
|
88 |
% |
Unrealized gain on equity securities increased by $342 thousand, or 88%, to $729 thousand for the six months ended June 30, 2024 as compared to $387 thousand for the six months ended June 30, 2023 primarily due to favorable market valuations through the first two quarters of 2024 as compared to the first two quarters of 2023.
Other Expense
|
|
Six Months Ended June 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Other expense, net |
|
$ |
(2,798 |
) |
|
$ |
(6,035 |
) |
|
$ |
3,237 |
|
|
|
(54 |
)% |
Other expense for the six months ended June 30, 2024 was $2.8 million, a decrease of $3.2 million, or (54)%, compared to the six months ended June 30, 2023. The decrease was primarily due to increased transaction costs related to the completion of the merger with ROC Energy Acquisition in June 2023.
35
Non-GAAP Financial Measures
To supplement our unaudited interim consolidated financial statements, which are prepared and presented in accordance with U.S GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP.
We use the non-GAAP financial measure Adjusted EBITDA, which is defined as net income (loss); excluding interest income; interest expense; other income (expense), net; income tax benefit (expense); depreciation and amortization; and certain other non-cash or non-recurring items impacting net income (loss) from time to time. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in Adjusted EBITDA.
This non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of this non-GAAP financial measures compared to the closest comparable U.S.GAAP measure. Some of these limitations are that:
The following tables present a reconciliation of Adjusted EBITDA to net income (loss) for the three and six months ended June 30, 2024 and 2023 (non-recurring transaction expenses recorded to other (income) expense are presented separately within Adjusted EBITDA):
|
|
Three Months Ended June 30, |
|
|||||
(In thousands) |
|
2024 |
|
|
2023 |
|
||
Net income (loss) |
|
$ |
365 |
|
|
$ |
937 |
|
Add (deduct): |
|
|
|
|
|
|
||
Income tax expense |
|
|
(82 |
) |
|
|
1,376 |
|
Depreciation and amortization |
|
|
5,681 |
|
|
|
4,717 |
|
Interest expense, net |
|
|
811 |
|
|
|
348 |
|
Stock option expense |
|
|
855 |
|
|
|
1,661 |
|
Management fees |
|
|
187 |
|
|
|
262 |
|
Loss (gain) on sale of property |
|
|
(51 |
) |
|
|
1 |
|
Unrealized (gain) loss on equity securities |
|
|
(480 |
) |
|
|
(420 |
) |
Transaction expense |
|
|
2,020 |
|
|
|
4,142 |
|
Other expense, net |
|
|
(341 |
) |
|
|
241 |
|
Adjusted EBITDA |
|
$ |
8,965 |
|
|
$ |
13,265 |
|
|
|
Six Months Ended June 30, |
|
|||||
(In thousands) |
|
2024 |
|
|
2023 |
|
||
Net income (loss) |
|
$ |
3,492 |
|
|
$ |
6,638 |
|
Add (deduct): |
|
|
|
|
|
|
||
Income tax expense |
|
|
854 |
|
|
|
3,099 |
|
Depreciation and amortization |
|
|
11,047 |
|
|
|
9,732 |
|
Interest expense, net |
|
|
992 |
|
|
|
922 |
|
Stock option expense |
|
|
1,064 |
|
|
|
1,661 |
|
Management fees |
|
|
375 |
|
|
|
478 |
|
Loss (gain) on sale of property |
|
|
(42 |
) |
|
|
(68 |
) |
Unrealized (gain) loss on equity securities |
|
|
(729 |
) |
|
|
(387 |
) |
Transaction expense |
|
|
2,909 |
|
|
|
5,838 |
|
Other expense, net |
|
|
(104 |
) |
|
|
197 |
|
Adjusted EBITDA |
|
$ |
19,858 |
|
|
$ |
28,110 |
|
Liquidity and Capital Resources
At June 30, 2024, we had $6.8 million of cash and cash equivalents. Our primary sources of liquidity and capital resources are cash on hand, cash flows generated by operating activities and, if necessary, borrowings under the Credit Facility Agreement. We may use
36
additional cash generated to execute strategic acquisitions or for general corporate purposes. We believe that our existing cash on hand, cash generated from operations and available borrowings under the Credit Facility Agreement will be sufficient for at least the next 12 months to meet working capital requirements and anticipated capital expenditures.
Credit Facility Agreement
Reference is made to the disclosure set forth under the heading “Revolving Credit Facility” in Note 7 – Revolving Credit Facility, of the notes to the unaudited condensed consolidated financial statements included elsewhere in this Report (the ”Interim Financial Statements).
Capital Expenditures
Our capital expenditure relates to capital additions or improvements that add to our rental or repair capacity or extend the useful life of our drilling tools and related infrastructure. Also, our capital expenditures replace tools that are lost or damaged by a customer and these are funded by a rental tool recovery sale amount from the customer. We regularly incur capital expenditures on an on-going basis in order to (i) increase or maintain our rental tool fleet and equipment, (ii) extend the useful life of our rental tools and equipment and (iii) acquire or upgrade computer hardware and software. The amount of our capital expenditures is influenced by, among other things, demand for our services, recovery of lost or damaged tools, schedules for refurbishing our various rental tools and equipment, cash flow generated by our operations, expected rates of return and cash required for other purposes.
Contractual Obligations and Commitments
Our material contractual obligations arise from leases of facilities and vehicles under noncancelable operating leases agreements. See Note 14, Commitments and Contingencies, of the notes to the Interim Financial Statements.
Tax Obligations
We currently have available federal net operating loss carryforwards to offset our federal taxable income, and we expect that these carryforwards will substantially reduce our cash tax payments over the next several years. If we forfeit these carryforwards for any reason or deplete them faster than anticipated, our cash tax obligations could increase substantially. For additional information, see Note 8, Income Taxes, of the notes to the Interim Financial Statements.
Cash Flows
The following table sets forth our cash flows for the period indicated:
|
|
Six Months Ended June 30, |
|
|||||
(In thousands) |
|
2024 |
|
|
2023 |
|
||
Net cash (used in) provided by: |
|
|
|
|
|
|
||
Operating activities |
|
$ |
4,391 |
|
|
$ |
14,061 |
|
Investing activities |
|
|
(26,728 |
) |
|
|
(13,388 |
) |
Financing activities |
|
|
23,495 |
|
|
|
4,338 |
|
Effect of changes in foreign exchange rate |
|
|
(377 |
) |
|
|
(207 |
) |
Net increase (decrease) in cash and cash equivalents |
|
$ |
781 |
|
|
$ |
4,804 |
|
Cash Flows (Used In) Provided by Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2024 was $4.4 million resulting from our net income of $3.5 million, adjusted for non-cash charges of $13.5 million in depreciation and amortization, including amortization of right of use assets and deferred financing costs, $1.0 million of stock-based compensation expense, and $0.2 million in provisions for excess and obsolete property, plant, and equipment. This was partially offset by a $5.0 million gain on rental tool recovery sales, $0.4 million in deferred tax expense, and $7.7 million in net changes from operating assets and liabilities. The $7.7 million in cash used in operating assets and liabilities is primarily due to a $1.5 million cash outflow in accounts receivable, $2.2 million cash outflows related to operating lease liabilities, and $5.9 million cash outflows related to accounts payable and accrued liabilities due to the timing of disbursements. These outflows were offset by a $2.0 million cash inflow related to prepaid expenses. We will continue to evaluate our capital requirements for both short-term and long-term liquidity needs, which could be affected by various risks and uncertainties, including, but not limited to, the effects of the current inflationary environment, rising interest rates, and other risks detailed in the section of this Report entitled “Risk Factors.”
37
Net cash provided by operating activities for the six months ended June 30, 2023 was $14.1 million resulting from our net income of $8.2 million, adjusted for non-cash charges of $12.0 million in depreciation and amortization, including amortization of right of use assets and deferred financing costs, $4.0 million of stock-based compensation expense as a result of the Business Combination, $0.4 million of bad debt expense and $0.5 million in deferred tax expense. This was partially offset by a $9.1 million gain on rental tool recovery sales and $1.8 million in net changes from operating assets and liabilities. The $1.8 million in cash used in operating assets and liabilities is primarily due to a $1.8 million cash outflow in accounts receivable associated with an increase in sales and higher revenues during the first six months of 2023 compared to the first six months of 2022, a $2.2 million cash outflow from operating lease liabilities as we increase right-of-use assets on hand and a $1.5 million cash outflow from prepaid expenses due to differences in timing of prepayments. This was partially offset by a $2.3 million cash inflow in accounts payable and accrued expenses due to differences in the timing of disbursements and a $1.4 million cash flow from inventory as a result of increased sales and revenues during the first six months of 2023. We will continue to evaluate our capital requirements for both short-term and long-term liquidity needs, which could be affected by various risks and uncertainties, including, but not limited to, the effects of the current inflationary environment, rising interest rates, and other risks detailed in the section of this Report entitled “Risk Factors.”
Cash Flows (Used In) Provided by Investing Activities
Net cash used in investing activities for the six months ended June 30, 2024 was $26.7 million. Purchases of property, plant, and equipment of $16.3 million and the acquisition of CTG for $18.2 million were partially offset by proceeds from rental tool recovery sales of $7.7 million.
Net cash used in investing activities for the six months ended June 30, 2023 was $13.4 million. Purchases of property, plant, and equipment of $24.6 million were partially offset by proceeds from rental tool recovery sales of $11.1 million and proceeds from the sale of property of $0.1 million.
Cash Flows (Used In) Provided by Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2024 was $23.5 million resulting from proceeds from the term loan of $25 million offset by $0.6 million in payments of deferred financing costs and $0.8 million in repayments of the Term Loan.
Net cash used in financing activities for the six months ended June 30, 2023 was $4.3 million resulting from proceeds from the Business Combination and PIPE Financing, net of transaction costs, of $23.1 million, partially offset by a net decrease in amounts outstanding under the Credit Facility Agreement of $18.3 million, payments of deferred financing costs of $0.3 million and payments to holders of DTIH convertible preferred stock in connection with the Business Combination of $0.2 million.
Critical Accounting Policies and Estimates
The Interim Financial Statements included in this Report have been prepared in accordance with U.S. GAAP. The preparation of these Interim Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. We also make estimates and assumptions that affect the reported amounts and related disclosures for the periods presented. Our estimates are based on our historical experience and other factors that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly. Additionally, changes in assumptions, estimates or assessments due to unforeseen events or other causes could have a material impact on our financial position or results of operations.
For a description of our critical accounting policies and estimates, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the "Annual Report"). In addition to the critical accounting policies and estimates disclosed in our Annual Report, accounting for Business Combinations was identified as a new critical accounting policy and estimate in the six months ended June, 2024.
Business Combinations
We account for business combinations using the acquisition method of accounting in accordance with ASC 805, Business Combinations. On the acquisition date for a business combination, we allocate the total purchase consideration for the acquisition to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. Additionally, we identify and attribute fair values and estimated lives to acquired intangible assets. We identify an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separately sold, transferred, licensed, rented, or exchanged.
38
We recognize goodwill, if any, in the amount by which the aggregate fair value of the total purchase consideration exceeds the aggregate fair value of the net assets (including intangible assets) acquired.
In determining the fair values of assets acquired (including intangible assets) and liabilities assumed, we utilize a variety of methods. Each asset acquired and liability assumed is measured at fair value from the perspective of a market participant. The methods used to estimate the fair values of intangible assets incorporate significant estimates and assumptions regarding the estimates a market participant would make in order to evaluate an asset, including, but not limited to, a market participant’s use of the asset as well as forecasts for cash flows, revenue growth, asset lives, customer attrition rates, royalty rates, income tax rates, and discount rates.
We believe that the estimated fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions that a market participant would use. While we use our best estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. The use of different assumptions related to these uncertain factors at acquisition could result in material changes to the amounts initially recorded at acquisition, which could have a material impact on our condensed consolidated financial statements. When appropriate, we engage third-party valuation specialists to assist in determining the fair values of assets acquired and liabilities assumed.
If the initial accounting for a business combination has not been completed by the end of the reporting period in which the business combination occurs, provisional amounts are reported to present information about facts and circumstances that existed as of the acquisition date. We must complete the accounting for each business combination during its measurement period, which cannot exceed one year from the acquisition date. Adjustments made during the measurement period could have a material impact on our condensed consolidated financial statements.
Costs that are directly attributable to business combinations are expensed as incurred within other expenses, net, on the condensed consolidated statements of income and comprehensive income. The results of operations of acquisitions are included in the consolidated financial statements from the date of acquisition.
Recently Issued and Adopted Accounting Standards
A discussion of recent accounting pronouncements is included in Note 1 – Summary of Significant Accounting Policies, to the Interim Financial Statements included elsewhere in this report.
JOBS Act Accounting Election
In April 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this extended transition period and, as a result, we will not adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. In addition, as an emerging growth company, we may take advantage of certain reduced disclosure and other requirements that are otherwise applicable generally to public companies. DTI will take advantage of these exemptions until such earlier time that it is no longer an emerging growth company. DTI would cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering; (ii) the last day of the fiscal year in which its total annual gross revenue is equal to or more than $1.07 billion; (iii) the date on which it has issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which it is deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Credit risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. We maintain cash and cash equivalents with major and reputable financial institutions. Deposits held with the financial institutions may exceed the amount of insurance provided by the Canadian Deposit Insurance Corporation and the Federal Deposit Insurance Corporation on such deposits but may be redeemed upon demand. We perform periodic evaluations of the relative credit standing of the financial institutions. With respect to accounts receivable, we monitor the credit quality of our customers as well as maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments.
Concentration risk
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A discussion of concentration risk is included in 1 – Summary of Significant Accounting Policies, to the Interim Financial Statements included elsewhere in this report.
Foreign currency risk
Our customers are primarily located in the United States and Canada. Therefore, foreign exchange risk exposures arise from transactions denominated in currencies other than the United States dollar, which is our functional and reporting currency. To date, a majority of our sales have been denominated in United States and Canadian dollars. As we expand our presence in international markets, our results of operations and cash flows may increasingly be subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements to minimize the impact of these fluctuations in the exchange rates. We will periodically reassess our approach to manage our risk relating to fluctuations in currency rates.
We do not believe that foreign currency risk had a material effect on our business, financial condition, or results of operations during the periods presented.
Inflation Risk
We expect we will continue to experience inflationary pressures on our cost structure for the foreseeable future. However, tightness in overseas freight and transit times have eased. Additionally, raw material and component costs are moderating due in part to a strengthening U.S. dollar and weakening steel demand. Nonetheless, we cannot be confident that transit times or input prices will return to the lower levels experienced in prior years. Continued inflation and looming concerns regarding a possible recession weigh on the outlook for oil demand which could in turn negatively impact demand for our goods and services.
Cybersecurity Risk
We have a suite of controls including technology hardware and software solutions, regular testing of the resiliency of our systems including penetration and disaster recovery testing as well as regular training sessions on cybersecurity risks and mitigation strategies. We have established an incident response plan and team to take steps it determines are appropriate to contain, mitigate and remediate a cybersecurity incident and to respond to the associated business, legal and reputational risks. There is no assurance that these efforts will fully mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur.
Item 4. Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures in effect as of June 30, 2024, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. As a result of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2024, or as of the date of the filing of this Report.
Our disclosure controls and procedures were not effective as of June 30, 2024, or as of the date of filing of this Report, because all findings in connection with our preparation and the audit of our consolidated financial statements as of and for the year ended December 31, 2023 have not been fully remediated despite ongoing projects and improvements made in the current quarter. As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of June 30, 2024, or as of the date of this filing, and we continue to have a material weakness in our internal control over financial reporting. This material weakness is described in more detail below.
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Prior to the Merger, we had been a private company with limited accounting personnel and other resources with which to address our internal control over financial reporting. In connection with our preparation and the audit of our consolidated financial statements as of and for the year ended December 31, 2023, we identified the following deficiencies in the design or operation of our internal controls to be a material weakness:
We are in the process of implementing a risk assessment process and measures designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weakness, including (1) hiring more qualified staff and increasing resources with sufficient knowledge and experience to strengthen financial reporting, (2) implementing software and procedures to enhance our Company’s IT environment and (3) devoting proper time by senior management to perform comprehensive review of procedures to assess risks and enforce effective accountability. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.
Changes in Internal Control over Financial Reporting
During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
See Part I, Item 1, Note 14 to our consolidated financial statements entitled “Commitments and Contingencies,” which is incorporated in this item by reference.
Item 1A. Risk Factors.
Our Annual Report filed with the SEC on March 28, 2024, describes important risk factors that could cause our business, financial condition, results of operations and growth prospects to differ materially from those indicated or suggested by forward-looking statements made in this Report or presented elsewhere by management from time to time. There have been no material changes to the risk factors that appear in the Annual Report as of the date of this Quarterly Report. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
During the three months ended June 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act)
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Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Report.
Exhibit Number |
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Description |
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2.1† |
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2.2 |
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3.1 |
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3.2 |
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31.1* |
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31.2* |
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32.1* |
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32.2* |
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101.INS* |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH* |
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Inline XBRL Taxonomy Extension Schema Document |
104* |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
† Certain exhibits and schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). We agree to furnish supplementally a copy of all omitted exhibits and schedules to the SEC upon its request.
# Indicates management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Drilling Tools International Corporation |
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Date: August 9, 2024 |
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By: |
/s/ David R. Johnson |
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David R. Johnson |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, R. Wayne Prejean, certify that:
Date: August 9, 2024 |
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By: |
/s/ R. Wayne Prejean |
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R. Wayne Prejean |
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Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David R. Johnson, certify that:
Date: August 9, 2024 |
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By: |
/s/ David R. Johnson |
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David R. Johnson |
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Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Drilling Tools International Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Date: August 9, 2024 |
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By: |
/s/ R. Wayne Prejean |
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R. Wayne Prejean |
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Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Drilling Tools International Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Date: August 9, 2024 |
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By: |
/s/ David R. Johnson |
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David R. Johnson |
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Chief Financial Officer |